Note 3 - Stock-based Compensation and Shareholders' Equity

9 Months Ended

Sep. 30, 2016

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

QNB sponsors stock-based compensation plans, administered by a Board Committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

Stock-based compensation expense was $18,000 for both the three months ended September 30, 2016 and 2015. Stock-based compensation expense was $60,000 and $64,000 for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was approximately $102,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 29 months.

Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 1998 Plan authorized the issuance of 220,500 shares. The time period during which any option is exercisable under the Plan is determined by the Committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of ten years after the date the option is awarded. The granted options vest after a three-year period. As of September 30, 2016, there were 225,058 options granted, 60,244 options forfeited, 164,814 options exercised and no remaining options outstanding under this Plan. The 1998 Plan expired on March 10, 2008.

The 2005 Plan authorized the issuance of 200,000 shares. The terms of the 2005 Plan are identical to the 1998 Plan, except options expire five years after the grant date. As of September 30, 2016, there were 184,200 options granted, 65,050 options forfeited, 64,425 options exercised, and 54,725 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.

The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 23,500 options granted and outstanding under this Plan as of September 30, 2016. There were no options forfeited or exercised as of September 30, 2016. The 2015 Plan expires on February 24, 2025.

The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.

The following assumptions were used in the option pricing model in determining the fair value of options granted during the period:

Nine months ended September 30,	2016			2015
Risk free interest rate		1.14	%		1.06	%
Dividend yield		3.78	%		3.86	%
Volatility		22.62	%		26.74	%
Expected life (years)		4.20			5.00

The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term approximating the expected life of the option being valued. Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.

The fair market value of options granted in the first nine months of 2016 and 2015 was $3.79 and $4.38, respectively.

Stock option activity during the nine months ended September 30, 2016 and 2015 is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2015		82,875		$	24.33
Granted		23,500			30.40
Exercised		(18,425	)		20.70
Forfeited		(9,725	)		25.61
Outstanding at September 30, 2016		78,225		$	26.85		2.74	$	560
Exercisable at September 30, 2016		23,100		$	22.38		0.87	$	268

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2014		88,375		$	23.27
Granted		21,000			29.25
Exercised		(12,150	)		17.81
Forfeited		(12,650	)		31.87
Outstanding at September 30, 2015		84,575		$	24.25		2.50	$	444
Exercisable at September 30, 2015		30,375		$	20.87		0.89	$	262